Columbia Credit Union Thrift Conversion Facing Challenges from Members; Legal Battle Could Be Looming

PORTLAND, Ore. – A group of concerned credit union members are organizing to force another vote in Columbia Community Credit Union’s attempt to change its credit union charter to that of a state chartered mutual bank. A majority of 16% of the Vancouver, Washington-based institution’s 60,000 members very narrowly voted to move to a mutual thrift charter on November 3. “We think it’s very clear that there are a number of credit union members who are very concerned about the way this vote was taken and believe Columbia members need a chance to reconsider this,” said Lloyd Marbet, Executive Director of the Oregon Conservancy Foundation. The Foundation, an environmental group based in Oregon, as well as Marbet himself, had moved money into the credit union a few months before the change. They had done so in part because they wanted a non-banking alternative for their money, Marbet explained after the vote. He added then that he was exploring what means credit union members had to challenge what many have come to see as a done deal. Marbet is generally considered a leader among the disaffected members and confirmed that he and the Conservancy Foundation have retained legal counsel in the matter. At the time of the vote, Marbet declined to say how much money the Foundation had in Columbia, but he expressed an opinion that the Foundation would withdraw its funds if Columbia became a bank. Issues So Far The margin of victory of just over 400 votes in the Columbia polling was the closest in the history of charter conversions and has sparked a flurry of comments about the way the credit union conducted the final meeting and how the institution described and placed the proposal before the members. Some of these concerns surfaced in a November 24 letter from the group’s Portland, Oregon, law firm of Kafoury and McDougal to Brian Witt, a lawyer with Farleigh Wada and Witt, also based in Portland. Witt had served as the parliamentarian for the controversial November 3 meeting. The letter said that Columbia Credit Union members believed that the conversion vote failed to secure the approval of two-thirds of the credit union’s membership, as required by Washington State law, as well as failed to secure a vote from 20% of the membership as, the letter argued, federal statute required when an institution was going to change its insurance status. The letter also suggested that the credit union had failed to insure a “chain of custody or verification for mailed ballots” and that there were “procedural irregularities” in the November 3 meeting. Although no one from the credit union was available to comment as of press time, it is widely accepted that Columbia never intended to certify the vote under Washington State’s law but instead under the more lenient NCUA standard. The NCUA standard requires that a credit union seeking to convert only obtain a majority among voting members and Washington’s credit union law allows state chartered institutions to use the NCUA rules when they choose. The insurance issue may be a bit harder for Columbia to resolve. Linda Williams, a lawyer with Kafoury and McDougal representing the Foundation, Marbet and the other members, said that under Federal law an institution must obtain the approval of 20% of its depositors when it is going to change from one insurer to another, even when both insurers are backed by the Federal government, as is the NCUSIF and the FDIC. Williams also pointed out that the credit union offered excess insurance to its members with more than $100,000 in their share accounts and that such insurance would not be available to members in the mutual thrift. Charlotte Bahin, Senior Vice President with America’s Community Bankers said that while she could not be definite about whether excess insurance would be available to thrift members, she imagined that it would probably not be. “I believe only Massachusetts has a fund established that allow its banks and thrifts to offer excess insurance,” Bahin said. Such insurance lost a lot of its credibility after a number of funds failed in different states, she explained. But Bahin also pointed out that the Office of Thrift Supervision, as the regulator receiving the institution, would have been expected to cover both the excess insurance issue and the 20% necessary member participation as part of its examination and review process that Columbia had to go through. A spokesman for the OTS said that though Williams’ assertion about the 20% sounded correct, his agency’s jurisdiction would not extend to a state chartered mutual thrift. The FDIC, whose jurisdiction does cover insurance questions from state chartered institutions, pointed out that the language Williams had cited came not from its regulations but from the federal code that governed credit unions changing insurance. “No credit union shall convert from status as an insured credit union under this chapter as provided under subsection (a)(2) of this section until the proposition for such conversion has been approved by a majority of all the directors of the credit union, and by affirmative vote of a majority of the members of the credit union who vote on the proposition in a vote in which at least 20 per centum of the total membership of the credit union participates.” 12 USC 1786(d)(2). Richard Garabedian, a lawyer with the nationwide law firm Jenkens and Gilchrist who has helped other credit unions change their charters, said Columbia could face a “very interesting question” if the credit union’s disclosures did not include information about the availability of excess insurance as a thrift. So far, it appeared that the credit union members’ questions and objections have succeeded at least in slowing down the process of certifying the vote. Cliff Northup, NCUA’s Director of Public and Congressional Affairs, confirmed that NCUA’s regional office has not certified the Columbia vote and is reviewing the complaints as part of its certification process, but said he was constrained from being able to offer other details. Other Legal Threats Loom While NCUA considers the different objections to the vote, the groups’ lawyers have put the credit union on notice that they are prepared to bring suit should any of the board members profit from the charter conversion. Columbia’s CEO, David Doss, is on record as saying the credit union is not interested in converting further to a charter that would allow it to issue stock, but the credit union members expressed concern that the possibility of leaders profiting from the change had not been adequately disclosed. “While there are technical objections to the vote, I am writing because my clients are equally concerned about the likelihood that the officers and directors of the credit union failed to mention their potential for personal gain in the disclosure statement, and urged a `yes’ vote without putting credit union members on notice of how officers and directors might later gain from a `yes’ vote,” Mark McDougal, a partner with Kafoury and McDougal wrote in a November 24 letter. “Should the conversion to a mutual savings bank be upheld by the Washington Department of Financial Institutions and/or a Court, any officers and directors of Columbia Credit Union who seek to later make personal gain for themselves or their family members in a conversion to a publicly held bank are hereby put on notice that that gain will be challenged as a breach of their fiduciary duty to the credit union members and appropriate remedies will be pursued,” the letter concluded. Where To From Here? While no court action in the matter has been filed so far, the indications appear to be that such an action is coming, and Marbet did not rule it out. A December 1 letter Marbet delivered to Karen Martel, Chairman of the Board for Columbia, reads a lot like what might be a list of documents sought in a lawsuit. In the letter, Marbet requests copies of transcripts, recordings, minutes or official notes that were taken at the November 3 meeting; a copy of the membership attendance list from the meeting; a copy of the contract between Columbia Credit Union and CU Financial Services that “laid the ground work for” the conversion; and a copy of the agreement between Columbia Credit Union and John Hancock which covered a Hancock employee serving as “Inspector of Elections” for the vote. CU Financial Services is a consulting firm that specializes in helping credit unions which are considering switching their charters. The letter also requested “a description of the current status and location of the ballots used by CCU members to vote in this election and what procedures are available for examining these ballots.” But Tony Ward-Smith, a longtime credit union consultant and himself a Columbia member since 1976, said that as important as this fight over the details may be, it misses some of the deeper issues in Columbia’s seeking to switch charters. Ward-Smith argued that much of the push to change charters among credit unions flowed from a “flawed” model of credit union management that judged credit unions almost solely by whether they grow or not. “We have fallen into a model where too many credit unions are growing for the sake of growing,” Ward-Smith said. “They are growing because they have forgotten how to compete on their strengths, which has always been to offer members a different focus in financial services.” Ward-Smith advocates an approach to credit union management that focuses not as much on “growth for the sake of growing” but instead on helping more credit unions measure success in how many relationships credit unions have with their members. “Credit unions don’t exist to merely get bigger,” Ward Smith said. “Credit unions exist to offer their members an approach to financial services that they are not going to get at a bank.” Credit unions which focus on building more relationships with their members become more profitable, stronger and more centered institutions that won’t need to engage in the commercial lending and other activities that are often cited as driving the desire to change charters, he argued. -